InsiderOnline Blog: May 2009

President Obama’s recent proposal on corporate taxes reveals that either he doesn’t understand how the U.S. tax code puts U.S. firms at a disadvantage globally, or he doesn’t care. Obama wants to tighten rules allowing U.S. companies to defer U.S. taxes on the income they earn from operations abroad, claiming the deferrals amount to a subsidy for U.S. companies to export jobs.

But, as Dan Mitchell explains in the video below, Obama has it all backward. Congress created the deferral system long ago as a way of offsetting some of the extra burdens that the U.S. tax code places on U.S. firms. Aside from a high U.S. corporate tax rate, the chief problem for U.S. firms operating abroad is that they face double taxation: They must pay taxes in the country where they operate, and U.S. taxes as well. Allowing companies to defer taxes on income they earn abroad is a second-best fix: the ideal solution would be for the U.S. to follow the practice of most other countries and tax only income earned within its borders.

That and lowering the U.S. corporate tax rate would not only help U.S. companies internationally, but would help level the playing field for companies creating jobs in the United States. As Mitchell explains, it is certainly a better way of leveling the playing field than Obama’s plan:

If deferral is curtailed, that may prevent an American company from taking advantage of a profitable opportunity to build a factory in some place like Ireland, but U.S. tax law does not constrain foreign companies operating in foreign countries. So there would be nothing to prevent a Dutch company from taking advantage of that profitable Irish opportunity. And since a foreign-based company can ship goods into the U.S. market under the same rules as a U.S. company’s foreign subsidiary, worldwide taxation does not insulate America from overseas competition. It simply means that foreign companies get the business and earn the profits.

Mitchell explains it all with numbers and examples in the video below: